Publication Date

6-27-2007

Description

Standard economic theory starting from Ricardo to the neoclassical model is quite clear about the benefits of trade between nations based on comparative advantage and relative factor endowments (Hecksher-Ohlin). The main conclusions of the free trade model are that all countries gain from trade and world output is increased; that the countries will tend to specialize in products that use their resources abundantly; and given identical technologies and production throughout the world, factor prices will equalize across trading countries. By enabling countries to move beyond their production possibility frontiers trade is assumed to stimulate growth by securing capital as well as consumption goods from other parts of the world. Trade thus stimulates economic growth, promotes and rewards those activities in which the country has relative abundance of factors of production. As developing countries posses labor in abundant supply their wages will rise and the majority of the population will be better off compared to no trade scenario. The criticism against international trade theory arises from the validity of some of the assumptions made by the proponents of the theory. For example, it is not obvious that all productive resources have identical quality or are perfectly mobile within and across the trading countries. Neither is the technology of production similar nor the markets are always competitive seeking cost minimization and profit maximization. Under these circumstances the realized benefits from trade may diverge from the intended benefits.

Notes

Keynote address at National Level Seminar on “Trade and Economic Growth Linkages” organized by Quaid-e-Azam University at Islamabad on June 27, 2007

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